The US Federal Reserve released transcripts from its 2007 meetings have shown it may have underestimated the looming global financial crisis.
The documents suggested Fed Governor Ben Bernanke wanted to hold off from addressing rising panic in the markets.
Ben Bernanke said in December 2007 that he did not “expect insolvency or near insolvency among major financial institutions”.
Yet many US banks and other financial firms had to be rescued in 2008.
With most of the country’s major lenders discovering billion-dollar losses linked to bad mortgage debt as the US housing market collapsed, investment banks such as Bear Stearns needed government funds ahead of being sold off cheaply, while another, Lehman Brothers, was ultimately closed down.
In 2008, the US government also had to bailout the federal mortgage agencies, Fannie Mae and Freddie Mac.
Although the financial crisis started as a result of the sharp downturn in the country’s housing market, it quickly spread around the world as US mortgage debt had been repackaged and sold to banks and other financial institutions around the globe.
The released Fed documents from 2007 also suggest current US Treasury Secretary Timothy Geithner underestimated the crisis.
Timothy Geithner, who at the time was president of the New York Federal Reserve Bank, said in August 2007: “We have no indication that the major, more diversified institutions are facing any funding pressure.”
Meanwhile in October 2007 Janet Yellen, another member of the Fed’s most senior committee, the Federal Open Market Committee, said: “I think the most likely outcome is that the economy will move forward toward a soft landing.”
The Fed did, however, take some action in 2007 to try to resolve the growing problems in the financial sector, cutting US interest rates three times.
In September 2007 it reduced its core rate to 4.75% from 5.25%, where it had been for more than a year. Two other rate cuts followed by the end of the year, before numerous further reductions in 2008.
And Janet Yellen said in December that “the possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real”.
US rates currently stand at between 0% and 0.25%, where they have been since December 2008.ben bernanke, federal reserve bank, global financial crisis